Soaring airline fee revenues draw tax scrutiny

With Congress searching for ways to narrow the gap between spending and revenues, there’s a growing pot of money with a giant target on its back: fees that airlines charge for everything from seat upgrades to food.

Why? These “ancillary fees” — items tacked on to the base price of a ticket — don’t get taxed like the price of airfare. That means airlines rake in the dough, but Uncle Sam isn’t getting his piece.

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The government funds a large portion of the aviation system through a 7.5 percent tax on the price of a commercial airline ticket as well as taxes on certain kinds of aviation fuel. But the Treasury Department considers charges outside the base cost of a ticket to be exempt from that tax.

For several years, lawmakers have been aware of untapped — and growing — add-on charges, but so far, they haven’t made any moves to change the tax regime. For the airline industry, which generally dislikes anything that raises the price of a ticket, the idea is a nonstarter.

But as revenues from the fees grow, and airlines get less and less of their income from base fares, it may be only a matter of time before Congress moves — particularly with talk of a tax overhaul in the air.

Rep. Nick Rahall (D-W.Va.), ranking member on the Transportation and Infrastructure Committee, said the issue deserves at least a look, though he noted it would fall to the tax-writing Ways and Means Committee.

“Yeah, I would say it needs to be examined at some point because they are playing pretty fancy-free and footloose with raising the various fees,” he told POLITICO.

Rep. Earl Blumenauer (D-Ore.), who sits on Ways and Means, said the committee is “serious about doing a deep dive on tax reform, and this is an area where it is — it has been noticed by a few folks,” he said. “And I’m confident that it will be looked at.”

But Blumenauer said it’s important not to jump in too fast. “Why we get screwed up on tax reform is everybody leads with the solution instead of, ‘Let’s take a deep breath and see how it works,’” he said.

As revenues from many traditional sources shrink, lawmakers are starting to consider new structures to try to stabilize tax flows.

“We’re in a series of downward spirals — the gas tax is in a downward spiral. The excise fee that we have on trucks and heavy equipment is creating real hiccups in revenue. And this is part of the business model changing the economics of how we finance aviation,” Blumenauer said. “So all of these things are worthy of being looked at, and I think they will be.”

According to the Bureau of Transportation Statistics, revenue from fares as a percentage of total passenger airline revenue has slowly been dropping. In 2007, the year airlines began charging for checked baggage, BTS recorded U.S. airlines as receiving 74.3 percent of revenues from fares. For the first three quarters of 2012, the most recent data available, airlines received 70.7 percent of revenue from fares.

Meanwhile, airline revenues from ancillary fees continue to grow. According to BTS, U.S. airlines collected nearly $3.5 billion in baggage fees in 2012 alone — and that’s not counting any of the other fees they now charge. That figure is nearly three times the $1.2 billion income from bag fees the airlines collected in 2008.